Home Production, Market Production and the Gender Wage Gap: Incentives and Expectations

Abstract:
This paper explores the hypothesis that gender wage differentials arise from the interaction between the intra-household allocation of labor and the contractual relation between firms and workers in the presence of private information on workers’ labor market attachment. In our model, households efficiently choose the contribution of each spouse to home production. Workers with high home hours are less attached to market work. Individual home hours and effort applied to market work are private information. Firms offer incentive compatible labor contracts that are constrained-efficient. Optimal contracts imply earnings that are inversely related to home hours. If firms believe women to be less attached to market work than men, they will offer women contracts with lower earnings and lower hours even in the absence of gender differences in productivity. If firms believe that labor market attachment is the same across genders, they will offer the same contract to male and female workers. Spouses’ optimal allocation of home hours will respond to firms’ beliefs, thus generating the potential for statistical discrimination by gender. It is the incentive problem in the labor market that gives rise to statistical discrimination in our model. The central role for informational problems as an important determinant of gender differences in labor market outcomes is motivated by the large variation in gender earnings differentials across industries and occupations observed in the data. We document these differences using Census data and we relate them to the severity of incentive problem across industries and occupations.